# Study Session 9: Equity Valuation: Valuation Concepts

## Is it worth going to retabulation of scores if I am Band 10 failed

Hi Guys,

I failed in Band 10. I am bit surprised with my Equity score which is <50%.

I want to know if retabulation of the scores manually would increase my chance of passing.

This is my scorecard. Could someone tell me if it is worth going for retabulation with my scores.

## Fama-French Three-factor Model

a theoretical question: in the fama-french three factor model, we get required rate of return on equity from the following equation:

R= Risk-free rate + b1 * market risk premium + b2 * small-cap return premium + b3 * value return premium. Here, b stands for factor beta.

## Intrinsic P/E vs Justified P/E

I bring this question up in response to CFAI 2011 PM Mock #57. In the book, they talked about justified P/E alot and importantly, always specified trailing or leading P/E. In this question they ask for the intrinsic P/E and do not specify. In the explanation they use the same equation as for justified forward P/E. (1-b)/(r-g)

Does anyone know what the distinction is between justified and intrinsic or if we should assume forward P/E when it’s not specified?

Thank you

## DDM/FCFF/FCFE firm valuation

Use DDM- Minority perspective

FCFF- cap structure instable, control perspective

FCFE?

## What is ROE?

According to Google “define ROE”:

“The mass of eggs contained in the ovaries of a female fish or shellfish, typically including the ovaries themselves…”

So my question is… which one of these is the correct definition?

A. ROE(2011) = Net Income(2011) / Book Value(2011)

B. ROE(2011) = Net Income(2011) / Book Value(2010)

C. Other: __________

## Heads Up4: DDM or no DDM

Profitable company with earnings growing at 5% annually, pays a good dividend of $1.25 every year. Would you use DDM to value the stock or not? Why?

## Heads Up3: Present value of the real cash flows

Nominal required rate of return 14%

Real required rate of return 8%

Present value of nominal cash flows discounted at 14%: Rs. 16.75 billion

Present value of real cash flows discounted at 14%: Rs. 12.25 billion

Present value of nominal cash flows discounted at 8%: Rs. 23.78 billion

The present value of the real cash flows discounted at 8% is *closest *to:

A. Rs. 14.06 billion.

B. Rs. 16.75 billion.

C. Rs. 23.78 billion

## Economic Profit - why dollar value of WACC is ammortized

Hi guys,

When calculating the Economic Profit, which is equal to NOPLAT(1-T) - $WACC, the dollar wacc is ammortized due to the depreciation from one year to another. Depreciation is a pure accounting procedure, which doesn’t really relate to the economic benefits or losses. I don’t really understand the concept, thus.

Can you shade some light on this?

Thanks!

## Schweser Book 5 Exam 2 - PM Section

Re: Question 91. How do they calc the expected change in the P/E? The formula for the Ibbotson model is

(1+expected Inflation)(1+Real earnings)(1+change in P/E) - 1 + div yield - RF

They come up with a change in P/E of .97??? The problem says the market is overvalued by 10% and they don’t really give the expected change in P/E.

OK, so I just realized the baseline valuation for this is 0 and will change depending on over/under valuation. But, I still don’t see where they come up with .97?

## ATOCF vs. NOPAT: does SGA count as a cost?

I’m just curious to know wether SGA is considered a cost in the ATOCF. I realize that one is a measure of cash flows while the other is a measure of profits. Still, I would think that SGA is a cost so that it should be included in both.

As I understand it, here are the equations for both measures:

ATOCF = (Sales - Costs - Depreciation)*(1-tax) + Depreciation

NOPAT = (Sales - Costs - SGA -Depreciation)*(1-tax)

Is there a reason why SGA is not in ATOCF?

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